CHAPTER 12 GLOBAL ALLIANCES AND STRATEGY IMPLEMENTATION

12.1 Strategic alliances

Strategic alliances are partnerships between two or more firms that decide they can better pursue their mutual goals by combining their resourcesfinancial, managerial, technologicalas well as their existing distinctive competitive advantages. Alliancesoften called cooperative strategies are transition mechanisms that propel the partners' strategies forward in a turbulent environment faster than would be possible for each company alone. Alliances typically fall under one of three categories: joint ventures, equity strategic alliances, and non-equity strategic alliances. Joint Ventures Two or more companies create an independent company in a joint venture (JV). An example is the Nuumi Corporation, created as a joint venture between Toyota and General Motors, which gave GM access to Toyota's manufacturing expertise and provided Toyota with a manufacturing base in the United States. Equity Strategic Alliances Two or more partners have different relative ownership shares (equity percentages) in the new venture in an equity strategic alliance. As do most global manufacturers, Toyota has equity alliances with suppliers, subassemblers, and distributors; most of these are part of Toyota's network of internal family and financial links. Recently, GM's expansion strategy has comprised taking minority stakes in other companies around the world. Non-equity Strategic Alliances Agreements are carried out through contract rather than ownership sharing in a non-equity strategic alliance. Such contracts are often with a firm's suppliers, distributors, or manufacturers, or they may be for purposes of marketing and information sharing, such as with many airline partnerships. Global Strategic Alliances Working partnerships between companies (often more than two) across national boundaries and increasingly across industries are referred to as global strategic alliances. A glance at the global airline industry, for example, tells us that global alliances have become a mainstay of competitive strategy.

12.1.1 Global and Cross-Border Alliances: Motivations and Benefits

1. To avoid import barriers, licensing requirements, and other protectionist legislation. Japanese automotive manufacturers, for example, use alliances such as GM-Toyota venture, or subsidaries, to produce cars in the United States so as to avoid import quotas. 2. To share the costs and risks of the research and development of new products and processes. In the semiconductor industry, for example, where each new generation of memory chips is estimated to cost more than $1 billion to develop, those costs and the rapid technological evolution typically require the resources of more than one, or even two, firms. Intel, for example, has alliances with Samsung and NMB Semiconductor for technology (DRAM) development; Sun Microsystems has partners for its technology (RISC), including N. V. Philips, Fujitsu, and Texas Instruments. Toshiba, Japan's third largest electronics company, has more than two dozen major joint ventures and strategic alliances around the world, including partners such as Olivetti, Rhone-Poulenc, GEC Alstholm in Europe, LSI Logic in Canada, and Samsung in Korea. Fumio 67

Sato, Toshiba's CEO, recognized long ago that a global strategy for a high-tech electronics company such as his necessitated joint ventures and strategic alliances. 3. To gain access to specific markets, such as the EU, where regulations favor domestic companies. Firms around the world are forming strategic alliances with European companies to bolster their chances of competing in the European Union (EU) and to gain access to markets in Eastern European countries as they open up to world business. The EU's new law, passed in November 2003, was intended to increase the opportunities for cross-border mergers and takeovers, for companies both within and outside of the EU. U.S. companies protested that the law did not go far enough to open up a "fortress Europe," because hostile bids would be more difficult to pursue. However, seven of the ten largest deals that Citigroup completed around the world in 2003, for example, were in Europeincluding the $2 billion acquisition of British tavern chain Pubmaster. Chun Joo Bum, chief executive of the Daewoo Electronics unit, acknowledges that he is seeking local partners in Europe for two reasons: (1) to provide sorely needed capital (a problem amid Asia's economic woes) and (2) to help Daewoo navigate Europe's still disparate markets, saying "I need to local-ize our management. It is not one market." Market entry into some countries may only be attained through alliancestypically joint ventures. South Korea, for example, has a limit of 18 percent on foreign investment in South Korean firms. 4. To reduce political risk while making inroads into a new market. Hong Kong Disneyland is jointly owned by the Chinese government, which owns a 57 percent stake. Beijing is especially interested in promoting tourism through the venture, and in the new employment for the 5,000 workers Disney will employ directly, as well as the estimated 18,000 in related services. Maytag Corporation, also determined to stay on the right side of the restrictive Chinese government while gaining market access, formed a joint venture with RSD, the Chinese appliance maker, to manufacture and market washing machines and refrigerators. Maytag also invested large amounts in jointly owned refrigeration products facilities to help RSD get into that market. Coca-Colaa global player with large-scale alliancesis not beyond using some very small-scale alliances to be "political" in China. The company uses senior citizens in the party's neighborhood committees to sell Coke locally. 5. To gain rapid entry into a new or consolidating industry and to take advantage of synergies. Technology is rapidly providing the means for the overlapping and merging of traditional industries such as entertainment, computers, and telecommunications in new digital-based systems, creating an information superhighway. Disney's business model of cellular partnerships and content sales, for example, created Disney mobile operations in Hong Kong, Taiwan, South Korea, Singapore and the Philippines. In many cases, technological developments are necessitating strategic alliances across industries in order for companies to gain rapid entry into areas in which they have no expertise or manufacturing capabilities. Competition is so fierce that they cannot wait to develop those resources alone. Many of these objectives, such as access to new technology and to new markets, are evident in AT&T's network of alliances around the world. Agreements with Japan's NEC, for example, give AT&T access to new semiconductor and chip-making technologies, helping it learn how to better integrate computers with communications. Another joint venture with Zenith Electronics will allow AT&T to co-develop the next generation of high-definition television (HDTV).

12.1.2 Challenges in Implementing Global Alliances

Effective global alliances are usually tediously slow in the making but can be among the best mechanisms to implement strategies in global markets. In a highly competitive environment, alliances present a faster and less risky route to globalization. It is extremely complex to fashion such linkages, however, especially where many interconnecting systems are involved, forming intricate networks. Many alliances fail or end up in a takeover in which one partner swallows the other. McKinsey & Company, a consulting firm, surveyed 150 companies that had been in alliances and found that 75 percent of them had been taken over by Japanese partners. Problems with shared ownership, the integration of vastly different structures and systems, the distribution of power between the companies involved, and conflicts in their relative locus of decision making and control are but a few of the organizational issues that must be worked out. All these problems, as well as cultural differences 68

contributed to the declining situation of the DaimlerChrysler-AG alliance. The synergies expected from the alliance have proven elusive, and, as of 2004, Chrysler's losses were mounting, to the point that Kirk Kerkorian, largest shareholder of the premerger Chrysler, brought DaimlerChrysler to court. He contended that the 1998 transaction had been misrepresented as a "merger of equals", but that Juergen Schrempp, the German chairman and CEO of DaimlerChrysler, intended the deal to be a takeover, not a merger. Now DaimlerChrysler is essentially a holding company run from Stuttgart that oversees separate business units, which share few products. Often, the form of governance chosen for multinational firm alliances greatly influences their success, particularly in technologically intense fields such as pharmaceuticals, computers, and semiconductors. In a study of 153 new alliances, researchers found that the choice of the means of governancewhether a contractual agreement or a joint venture depended on a desire to control information about proprietary technology. Thus, joint ventures are often the chosen form for such alliances because they provide greater control and coordination in high-technology industries. Cross-border partnerships, in particular, often become a "race to learn"with the faster learner later dominating the alliance and rewriting its terms. In a real sense, an alliance becomes a new form of competition. In fact, according to researcher David Lei,
Perhaps the single greatest impediment managers face when seeking to learn or renew sources of competitive advantage is to realize that co-operation can represent another form of unintended competition, particularly to shape and apply new skills to future products and businesses.

All too often, cross-border allies have difficulty collaborating effectively, especially in competitively sensitive areas; this creates mistrust and secrecy, which then undermine the purpose of the alliance. The difficulty that they are dealing with is the dual nature of strategic alliancesthe benefits of cooperation versus the dangers of introducing new competition through sharing their knowledge and technological skills about their mutual product or the manufacturing process. Managers may fear that they will lose the competitive advantage of the firm's proprietary technology or the specific skills that their personnel possess. One example of a situation of potential loss of proprietary technology affecting entire industries became apparent in January 2004 when China announced that foreign computer and chip makers selling various wireless devices there would have to use Chinese encryption software and coproduce their products with Chinese companies from a designated list.
Foreign computer makers, led by American companies, have protested the decision. In addition to their concern about the separate standard, foreign companies are worried about the possible loss of intellectual property if they are forced to work with Chinese companies that have the potential to become competitors. The concern is about products such as DVD players; about half of the world's DVD players are now made in China. If China develops its own technical standards for the next generation of DVDs, it would be avoiding royalty payments to patent-holding corporations in Japan, Europe, and the United States, and in doing so fractures the world market.

The cumulative learning that a partner attains through the alliance could potentially be applied to other products or even other industries that are beyond the scope of the alliance, and therefore would hold no benefit to the partner holding the original knowledge. As noted by Lei, the Japanese have far overtaken their US. allies in developing and applying new technologies to other uses. Examples are in the power equipment industry (e.g., Westinghouse-Mitsubishi), the office equipment industry (KodakCanon), and the consumer electronics industry (General Electric-Samsung).

69

Exhibit 1 The dual role of strategic alliances Cooperative Competitive

Economies in scale in intangibe assets (e.g., Opportunity to learn new intangible skills from partner, plant and equipment) often tacit or organization embedded. Accelerate diffusion of industry standards and new Upstream-downstream of labour among technologies to erect barriers to entry. ' parteners. Deny technological and learning initiative to partner Fill out product line with components or end via outsourcing and long-term supply arrangements. products provided by supplier. Encircle existing competitors and preempt the rise of Limit investment risk when entering new new competitors with alliance partners in "proxy wars" markets or uncertain technological fields via to control market access, distribution, and access to shared resources. new technologies. Create a critical mass to learn and develop Form clusters of learning among suppliers and related new technologies to protect domestic, strategic firms to avoid or reduce foreign dependence for critical industries. inputs and skills. Assist short-term corporate restructurings by lowering set Alliances serve as experiential platforms to "demature" barriers in mature or declining industries. and transform existing mature industries via new components, technologies, or skills to enhance the value of future growth options

12.2 Strategic implementation

Decisions regarding global alliances and entry strategies must now be put into motion with the next stage of planning: strategic implementation. Implementation plans are detailed and pervade the entire organization because they entail setting up overall policies, administrative responsibilities, and schedules throughout the organization to enact the selected strategy and to make sure it works. In the case of a merger or IJV, this process requires compromising and blending procedures among two or more companies and is extremely complex. The importance of the implementation phase of the strategic management process cannot be overemphasized. Until they are put into operation, strategic plans remain abstract ideas: verbal or printed proposals that have no effect on the organization. Successful implementation requires the orchestration of many variables into a cohesive system that complements the desired strategythat is, a system of fits that will facilitate the actual working of the strategic plan. In this way, the structure, systems, and processes of the firm are coordinated and set into motion by a system of management by objectives (MBO), with the primary objective being the fulfillment of strategy. Managers must review the organizational structure and, if necessary, change it to facilitate the administration of the strategy and to coordinate activities in a particular location with headquarters. In addition to ensuring the strategy-structure fit, managers must allocate resources to make the strategy work, budgeting money, facilities, equipment, people, and other support. Increasingly, that support necessitates a unified technology infrastructure in order to coordinate diverse businesses around the world and to satisfy the need for current and reliable information. An efficient technology infrastructure can provide a strategic advantage in a globally competitive environment. An overarching factor affecting all the other variables necessary for successful implementation is that of leadership; it is people, after all, who make things happen. The firm's leaders must skillfully guide employees and processes in the desired direction. Managers with different combinations of experience, education, abilities, and personality tend to be more suited to implementing certain strategies. In an equity-sharing alliance, sorting out which top managers in each company will be in which position is a sensitive matter. Who in which company will be CEO is usually worked out as part of the initial deal in alliance agreements. This problem seems to be frequently settled these days by setting up joint CEOs, one from each company. Setting monitoring systems into place to control activities and ensure success completes, but does not end, the strategic management process. Rather, it is a continuous 70

process, using feedback to reevaluate strategy for needed modifications and for updating and recycling plans. Of particular note here we should consider what is involved in effective management of international joint ventures, since they are such a common form of global alliance, and yet they are fraught with implementation challenges.

12.2.1 Managing Performance in International Joint Ventures

Much of the world's international business activity involves international joint ventures (IJVs), in which at least one parent is headquartered outside the venture's country of operation. IJVs require unique controls. Ignoring these specific control requisites can limit the parent company's ability to efficiently use its resources, coordinate its activities, and implement its strategy. The term IJV control can be defined as "the process through which a parent company ensures that the way a joint venture is managed conforms to its own interest." Most of a firm's objectives can be achieved by careful attention to control features at the outset of the joint venture, such as the choice of a partner, the establishment of a strategic fit, and the design of the IJV organization. The most important single factor determining IJV success or failure is the choice of a partner. Most problems with IJVs involve the local partner, especially in less developed countries. In spite of this fact, many firms rush the process of partner selection because they are anxious to "get on the bandwagon" in an attractive market. In this process, it is vital to establish whether the partners' strategic goals are compatible. The strategic context and the competitive environment of the proposed IJV and the parent firm will determine the relative importance of the criteria used to select a partner. IJV performance is also a function of the general fit between the international strategies of the parents, the IJV strategy, and the specific performance goals that the parents adopt. Research has shown that, to facilitate this fit, the partner selection process must determine the specific task-related skills and resources needed from a partner, as well as the relative priority of those needs. To do this, managers must analyze their own firms and pinpoint any areas of weakness in task-related skills and resources that can be overcome with the help of the IJV partner. Organizational design is another major mechanism for factoring in a means of control when an IJV is started. This refers to the relative amount of decision-making power that a joint venture will have, compared with the parents, in choosing suppliers, product lines, customers, and so on. It is also crucial to consider beforehand the relative management roles each parent will play in the IJV because such decisions result in varying levels of control for different parties. An IJV is usually easier to manage if one parent plays a dominant role and has more decision-making responsibility than the other in daily operations. Alternatively, it is easier to manage an IJV if the local general manager has considerable management control, keeping both parents out of most of the daily operations. Where ownership is divided among several partners, the parents are more likely to delegate the daily operations of the IJV to the local IJV managementa move that - resolves many potential disputes. In addition, the increased autonomy of the IJV tends to reduce many common human resource problems: staffing friction, blocked communication, and blurred organizational culture, to name a few, which all result from the conflicting goals and working practices of the parent companies. Regardless of the number of parents, one way to avoid such potential problem situations is to provide special training to managers about the unique nature and problems of IJVs. Various studies reveal three complementary and interdependent dimensions of IJV control: (1) the focus of IJV controlthe scope of activities over which parents exercise control; (2) the extent, or degree, of IJV control achieved by the parents; and (3) the mechanisms of IJV control used by the parents. The extent of control exercised over an IJV by its parent companies seems to be primarily determined by the decision-making autonomy that the parents delegate to the IJV managementwhich is largely dependent on staffing choices for the top IJV positions and thus on how much confidence the partners have in these managers. In addition, if top managers of the IJV are from the headquarters of each party, the compatibility of the managers will depend on how similar their national cultures are this is

71

because there are many areas of control decisions where agreement will be more likely between those of similar cultural backgrounds. Knowledge Management in IJVs Managing the performance of an IJV for the long term, as well as adding value to the parent companies, necessitates managing the knowledge flows within the IJV network. Knowledge management is "the conscious and active management of creating, disseminating, evolving, and applying knowledge to strategic ends." In particular, the sharing and development of technology among IJV partners provides the opportunity for knowledge transfer among those individuals who have internalized that information, beyond any tangible assets is a key factor; the challenge is to develop and harvest that information to benefit the parents through complementary synergies. Those IJVs that were successful in meeting that challenge were found to have personal involvement by the principals of the parent company in shared goals, in the activities and decisions being made, and in encouraging joint learning and coaching.

12.2.2 Government Influences on Strategic Implementation

Host governments influence, in many areas, the strategic choices and implementations of foreign firms. The profitability of those firms is greatly influenced, for example, by the levell of taxation in the host country and by any restrictions on profit repatriation. Other important influences are government policies on ownership by foreign firms, on labor union rules, on hiring and remuneration practices, on patent and copyright protection, and so on. For the most part, however, if the corporation's managers have done their groundwork, all these factors are known beforehand and are part of the location and entry strategy decisions. However, what hurts managers is to set up shop in a host country and then have major economic or governmental policy changes after they have made a considerable investment. Unpredictable changes in governmental regulations can be a death knell to businesses operating abroad. Although this occurs in many countries, one country that is often the subject of concern for foreign firms is China. In a survey of European investment in China, for example, 54 percent of companies questioned said their performance in China was worse than they had anticipated. Caterpillar was one of the companies with rapid market growth in producing diesel engines in China in the early 1990sconstruction was booming and foreign investment was flooding in. But in 1993, Chinaafraid that foreign investment was causing inflationrevoked tax breaks and restricted foreign investment. The tables turned on Caterpillar after that because there was not enough domestic demand for their products While China contends it is more committed to a market economy since it joined the W.T.O. in November 2001, history shows that foreign firms need to be cautious about entering China. Political change, in itself, can, of course, bring about sudden change in strategic implementation of alliances of foreign firms with host-country projects. This was evident in May 1998 when President Suharto of Indonesia was ousted following economic problems and currency devaluation. The new government began reviewing and canceling some of the business deals linked with the Suharto family, including two watersupply privatization projects with foreign firmsBritain's Thames Water PLC and France's Suez Lyonnaise des Eaux SA.The Suharto family had developed a considerable fortune from licensing deals, monopolies, government "contracts," and protection from taxes. Alliances with the family were often the only way to gain entry for foreign companies.

12.2.3 Cultural Influences on Strategic Implementation

When managers are responsible for implementing alliances among partners from diverse institutional environments, such as transition and established market economies, they are faced with the critical challenge of reconciling conflicting values, practices, and systems. In other situations, the culture variable is often overlooked when deciding on entry strategies and alliances, particularly when we perceive the target country to be familiar to us and similar to our own. However, cultural differences can have a subtle and often negative effect. 72

Since many of Europe's largest MNCsincluding Nestle, Electrolux, and Rhone-Poulenc experience increasing proportions of their revenues from their positions in the United States, and employ more than 2.9 million Americans, they have decided to shift the headquarters of some product lines to the United States. As they have done so, however, there is growing evidence that managing in the United States is not as easy as they anticipated it would be because of their perceived familiarity with the culture. It was found that European managers appreciate that Americans are pragmatic, open, forthright, and innovative. However, they also say that the tendency of Americans to be informal and individualistic means that their need for independence and autonomy on the job causes problems in their relationship with the head office Europeans. Americans simply do not take well to directives from a foreignbased headquarters. Rosenzweig presents some comments from French managers on their activities in the United States: Other European firms have had more successful strategic implementation in their US. plants by adapting to U.S. culture and management styles. When Mercedes-Benz of Germany launched its plant in Tuscaloosa, Alabama, U.S. workers and German "trainers" had doubts. Lynn Snow, who works on the door line of the Alabama plant, was skeptical whether the Germans and the Americans would mesh well. Now she proudly asserts that they work together, determined to build a quality vehicle. As Jurgen Schrempp, CEO of Mercedes's parent, Daimler-Benz (now part of DaimlerChrysler), observed, '"Made in Germany'we have to change that to 'Made by Mercedes,' and never mind where they are assembled." The German trainers recognized that the whole concept of building a Mercedes quality car had to be taught to the U.S. workers in a way that would appeal to them. They abandoned the typically German strict hierarchy and instead designed a plant in which any worker could stop the assembly line to correct manufacturing problems. In addition, taking their cue from Japanese rivals, they formed the workers into teams that met every day with the trainers to problem solve. Out the window went formal offices and uniforms, replaced by casual shirts with personal names on the pocket. To add to the collegiality, get-togethers for a beer after work became common. "The most important thing is to bring together the two cultures," says Andreas Renschler, who has guided the M-Class since it began in 1993. "You have to generate a kind of ownership of the plant." The local community has also embraced the mutual goals, often having beer fests and including German-language stations on local cable TV. The impact of cultural differences in management style and expectations is perhaps most noticeable and important when implementing international joint ventures. The complexity of a joint venture requires that managers from each party learn to compromise to create a compatible and productive working environment, particularly when operations are integrated. Discussion questions 1. Discuss the reasons that companies embark on cross-border strategic alliances. What other motivations might prompt such alliances? 2. Why are there an increasing number of mergers with companies in different industries? 3. Discuss the problems inherent in developing a cooperative alliance to enhance competitive advantage, but also incurring the risk of developing a new competitor. 4. What are the common sources of incompatibility in cross-border alliances? What can be done to minimize them? 5. Explain how the host government may affect strategic implementation in an alliance or another form of entry strategy.

73